Loan Participation Extension Non-Event for Some

Almost a year to the date since Navy Federal Credit Union launched its commercial participation loan program, the country’s largest cooperative said it is ready for changes mandated by an NCUA rule even after the regulator recently extended a compliance deadline.

“Navy Federal is prepared for the Sept. 23 effective date of the NCUA loan participation rule, and we’re monitoring any possible impact the new ruling and effective date will have on other credit unions,” said Jim Salmon, vice president of business sevices at the $54 billion Navy Federal in Vienna, Va.

At its June 20 meeting, the NCUA Board approved several revisions to the rule, including subjecting purchasing credit unions to a single-originator concentration limit of $5 million or 100% of net worth, whichever is greater.

The NCUA also approved a change that allows federally insured credit unions to establish different underwriting standards for loan participations than they use when originating their own loans. Credit unions will also now have the ability to apply for waivers on certain key provisions of the rule.

The initial effective date for the newly revamped loan participation rule was July 25. However, on July 3, the NCUA said it would extend the compliance deadline to Sept 23 because some federally insured credit unions faced difficulties implementing the new rule by original deadline date. The regulator said it would also issue guidance.

Nearly a year before, on July 1, 2012, Navy Federal’s C-PaL program made its debut to allow partnering credit unions to originate participation loans with Navy Federal being the buyer of between 40% and 60% of the loan amount.

With C-PaL, Navy Federal said it would not take the lead in the participation loan deals, choosing to appreciate and respect the fact that other credit unions may want to maintain current relationships and run the daily interactions with members. At the same time, Navy Federal will still hold the partnering credit unions accountable to the covenant of their participation loans.

“Our C-PaL program has been successful in providing relief to credit unions who are edging closer to their commercial loan caps, and we’ll continue to partner with those looking to grow their business lending ,” Salmon said.

Hard figures were not available on C-PaL’s transactions, however, the credit union said it has had some success so far this year and is looking to do more deals.

Navy Federal is certainly in a position to share lending opportunities. The credit union said it book $753 million in consumer loan originations in May – the best month in the cooperative’s 80-year history. So far in 2013, $2.3 billion of its record $3.1 billion in consumer loan originations has stemmed from auto loans.

Meanwhile, some within the credit union industry have expressed mixed reactions to the revised loan participation rule ranging on the negative end, from imposing another limitation on member business lending activities to questioning whether it’s even necessary to mitigate loan default risk.

Others applauded parts of the revised rule saying it adds teeth to addressing lead lender risk and provides more room for growth with the increased in maximum participation purchase from 25% of net worth to 100%.

One business lending CUSO CEO gave Credit Union Times a heads up on a turnkey product the company is discussing that will help smaller credit unions offer member business loans.

“Most can’t make the economic justification required to start an MBL program. It would involve loan participations, originated locally by credit union lenders, not from loan brokers,” said the CEO who was not ready to reveal all the details of the product.

The current 12.25% MBL cap affects those plans, he added, but being the greater of $5 million or 100% of capital from any one originator certainly is better than the original 25% of capital proposed earlier.